Skip to content
All library documents

Calendar Spreads: Volatility Backwardation and Longer-Dated Options

Article Quant Q&A · Author: vonjd
Read the original

Summary

The response discusses how implied volatility differences between expiration dates can affect calendar spread pricing. It suggests that when front-month implied volatility is below back-month volatility, calendars may have broader profit ranges and higher probability of profit. A high overall implied volatility percentile may also raise the spread’s net theta by making the short option relatively richer, though this can coincide with greater realized volatility and larger price moves.

The writer favors longer-dated long options, potentially extending to six months, and describes repeatedly selling nearer-term premium against them. This approach is presented as a practical preference, not as a finding from historical SPY backtests. The response provides no measured results, specific risk-return estimates, or supporting data, and it acknowledges that historical analysis requires access to detailed option and underlying prices. Adjustments may be needed if the underlying moves past the spread’s breakeven points.

Key ideas

  • The relative implied volatility of the near and deferred expirations can influence calendar spread pricing and potential returns.
  • A high implied volatility percentile may increase net theta while also coinciding with larger realized price movements.
  • Longer-dated options can be held while nearer-term options are repeatedly sold to collect premium.
  • The response gives a trading preference rather than historical backtest evidence or quantified performance.

Tags

OptionsVolatilityBacktesting
Full text
# Finding optimal calendar spreads and diagonals


# Finding optimal calendar spreads and diagonals












I am looking for some pointers on risk/return profiles of calendar spreads and diagonals with different strikes and expiration dates, preferably based on historical backtests with SPY options.

Please post anything that might be helpful, be it blog posts, articles, papers, software/code (preferably R, but other programming languages are also ok).

## Answer by Dr. Michael J. Stefano (score 1)

https://quant.stackexchange.com/a/85332

dont know of any good backtest data here except for probably people who can write thier own programs and have access to all of the back data for the underlying and option data prices. that would be a precious commodity.

however, calendars in general have wider P/L ranges and higher prob of profit when the front month IV is in backwardation. below is a snapshot of a site I use that tells me the IV30 percentile ranking. right now it shows GLD with a very high IV percentile ranking. when it is high, the spread will usually have a lower net debit from the higher net positive IV differential between the contracts and therefore a higher net + theta. while the roi will be higher and the p/l range wider, it may go along with more realized volatility which could make the price move beyond the break evens, which is where you need to decide/learn ow to make adjustments to the spreads. i like to use longer dated options, up to 6 months so that the IV skew and the net + theta is higher. longer dated long options have a lower average cost per day and a theta that is lower than their average cost per day. this makes it into a serial calendar which gives me plenty of time to sell more prem that bought, especially when i started out as i described above.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.